US Tax Treaty Policy and the European Court of Justice
Bilateral tax treaties between the United States and the Member States of the European Union (EU) face an uncertain future. Tax treaties may be the next in a long line of domestic tax laws invalidated by the European Court of Justice (ECJ). The ECJ has cut a wide swath through European national tax systems in the name of eliminating tax obstacles to a single market in Europe. The United States, previously content to observe the decisions of the ECI from a safe distance across the Atlantic, may be thrust into the fiscal federalism struggle in Europe because of its tax treaties with EU Member States.
Tax treaties help prevent cross-border investors from being taxed twice: once by the foreign country and a second time by their home country. The United States has tax treaties in force with twenty-four of the twenty-five EU Member States, and these treaties constitute more than one-third of the outstanding US tax treaty network. The treaties protect a tremendous amount of bilateral US-EU investment. Nearly one-half of US foreign portfolio investment is in EU securities, totaling approximately $1400 billion. EU portfolio investment in the United States is approximately $1600 billion and accounts for over one-third of total foreign portfolio investment in the United States. Nearly one-half of US foreign direct investment is in EU countries, and EU investment accounts for at least 62% of the total foreign direct investment in the United States. The possibility that US-EU tax treaties could be held to be incompatible with EC law creates legal uncertainty for both the contracting states and taxpayers and could affect these investment flows.